Was Blue Monday a bottom on the Euro?

The forex markets never cease to surprise me. One moment they are skittish and nervous like a show pony, and the next minute they shrug their shoulders to say “We knew that was going to happen” at a series of credit downgrades across Europe.

Friday the 13th last week saw rumours flying all over the place that these downgrades were coming, sending markets into a panic. Come Monday morning – nine downgrades later, and apparently (being the 3rd Monday in January) the most depressing day of the year – all was quickly forgiven and forgotten.

Here’s how the Euro/USD reacted …

But before we get too excited about this nice little up-trend that’s taking shape, let’s remind ourselves of the long-term picture on the Euro with an hourly chart …

Not many people would believe that last weekend would represent the low point for the Euro – with the political situation as it is, it seems highly unlikely that things are going to get better quickly.

And the long-term picture on this chart remains very bearish on the Euro.

So, how can we find signs that this week’s uptrend is about to run out of steam?

A good way to do this is to look for a momentum indicator like RSI or, err, the momentum indicator.

Simple “overbought” and “oversold” signals on the RSI aren’t great in a strong trend like this. It has a habit of giving us overbought signals while the market charges on upwards.

Instead, we’ll look for divergence, which may take a little longer to appear, but will show us not that momentum has peaked, but that it’s running out.

Here’s how it works …

On the chart below, I’ve added the RSI and the Momentum indicator to the chart, and you can see that both of these suggest that the momentum behind this uptrend is dwindling …

The trend on both momentum indicators is downward – in divergence from the uptrend we’re seeing in the price chart.

Momentum divergence, in itself, is not a signal to start shorting the euro, but it is an excellent way to “take the temperature” of a trend. Giving us a warning sign that we should be looking for signals to go short.

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